A NIESR paper, The Unintended Consequence of EVEL, argues that England’s dominance of the UK in economic and population terms means that English policy considerations drive monetary policy as it affects all parts of the UK. Under EVEL, Scottish MPs would have a much-reduced say in many of these.
“In our view, the influence of English decisions on the Scottish economy justifies a Scottish vote on English laws,” the paper says
One of the authors, research fellow Monique Ebell, told Public Finance that the asymmetrical sizes of the UK nations made it hard to see how fiscal autonomy could ever work within monetary union, even if a fully independent Scotland shared the pound, as was proposed by the Scottish National Party at last year’s referendum.
“If Scotland chose independence, we think there are good economic reasons for [Scotland to have] its own currency, in the same way that Norway, Sweden or Denmark have their own currencies,” Ebell said.
The paper, written with NIESR’s director of macroeconomics Angus Armstrong, is sceptical about the effectiveness of the Smith Commission’s “no detriment” provision, which proposes adjustments in Scotland’s block grant through the Barnett Formula to ensure that post-devolution decisions in one part of the UK under the new fiscal devolution regime do not disadvantage other parts.
This idea is both incompatible with the central aim of a monetary union in sharing risk, the paper argues, and impractical for several reasons. One is “gearing,” the knock-on effect on devolved budgets in Scotland of block grant adjustments made in respect of reserved powers. Another is the vastly different sizes of the UK’s constituent nations.
“Under current arrangements, the Bank of England’s mandate is to set monetary policy for the entire UK,” the paper says.
“Implicitly, this requires placing weight on the impact of monetary policy on England and Scotland in proportion to their sizes or economic importance.”
Until now, Ebell said, the theoretical trade-off for this imbalance had been the involvement of Scottish MPs in UK policy-making, thereby ensuring a Scottish influence on UK government decisions. Under EVEL, that would be diminished.
The paper says that a case can be made on the same principle for English MPs to get a say in Scottish fiscal policy, but the case is not a strong one. “Scotland stands to lose more by EVEL than England. The reason is that the monetary policy chosen by the central bank will be much more strongly influenced by economic conditions in England.
“In our view, this gives a rationale for allowing Scottish MPs to continue to vote on English fiscal policy, even when the issues at hand are only directly relevant under English jurisdiction,” it says.
“Even identifying English policy which would not have a direct spillover to Scotland is a challenge.
“It would also be better if English MPs retained a vote on Scottish fiscal policy,” the paper adds.
”However, because Scotland’s impact on the central bank’s monetary policy is so small, the losses to England from having a Scottish Parliament with sovereignty over Scottish fiscal policy are also very small.”
